Capabilities and Coherence: Delivering Business Value Through IT

As companies emerge from the severe economic downturn, more and more of them are adopting capabilities-driven strategies to drive new growth and earn the right to win in their markets. CIOs have an indispensable role to play in these organizations, both in helping to define corporate capabilities and strategies, and in ensuring that IT is properly aligned with them.

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Eduardo Alvarez Steven Waller Ahmad Filsoof

Capabilities and Coherence Delivering Business Value Through IT

This report was originally published before March 31, 2014, when Booz & Company became Strategy&, part of the PwC network of firms. For more information visit

Contact Information Beirut Ramez Shehadi Partner +961-1-336433 [email protected] Raymond Khoury Principal +961-1-336433 [email protected] Berlin Jörg Böckmann Principal +49-30-88705-816 [email protected] Canberra David Batrouney Principal +61-2-6279-1235 [email protected] Chicago Eduardo Alvarez Partner +1-312-578-4774 [email protected] Steven Waller Principal +1-312-578-4621 [email protected] Düsseldorf Dietmar Ahlemann Principal +49-211-3890-287 [email protected] Frankfurt Stefan Stroh Partner +49-69-97167-423 [email protected] Olaf Acker Principal +49-69-97167-453 [email protected] Milan Enrico Strada Partner +39-02-72-50-93-00 [email protected] Munich Bernhard Rieder Partner +49-89-54525-670 [email protected] Stephan Dresel Senior Associate +49-89-54525-582 [email protected] New York Jeffrey Tucker Partner +1-212-551-6653 [email protected] São Paulo Jorge Lionel Principal +55-11-5501-6200 [email protected] Shanghai Andrew Cainey Partner +86-21-2327-9800 [email protected] Sydney Peter Burns Partner +61-2-9321-1974 [email protected]

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As companies emerge from the severe economic downturn, more and more of them are adopting capabilities-driven strategies to drive new growth and earn the right to win in their markets. CIOs have an indispensable role to play in these organizations, both in helping to define corporate capabilities and strategies, and in ensuring that IT is properly aligned with them. In fulfilling this role, CIOs need to look beyond shortterm cost cutting and challenge their current assumptions about the value IT delivers to their companies. They can accomplish this by understanding the IT support required to advance and differentiate the company’s essential capabilities. This capabilities-driven approach to IT fully considers demand management, delivery models, and governance issues that will enable CIOs to make better decisions about the types of services IT provides, the quality of those services, and who receives them. CIOs who embrace such an approach will be well positioned to manage costs while adding business value. In the process, they will not only align IT more closely with the company’s overall strategies but ensure that IT enables and enhances the essential capabilities that drive competitive advantage.

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The Role of Functions in a Capabilities-Driven Strategy A capabilities-driven strategy is built on a committed focus on what a company does best. Typically, this entails identifying an explicit set of three to six mutually reinforcing capabilities that lead to the creation of business models, products, and services that competitors can’t easily beat. Each of these capabilities is composed of a unique combination of process, tools, knowledge, and organization. Once these capabilities are identified, they are further developed into a cohesive strategic road map. For example, Walmart’s capabilities, which include aggressive vendor management, point-of-sale data analytics, superior logistics, and rigorous working capital management, have enabled it to pursue a low-price/high-volume strategy that its competitors cannot match. Capabilities and the capabilities system (i.e., the interlocked, mutually reinforcing system of three to six capabilities that perpetuate competitive advantage) reside at the business level. But each function has an essential supporting role to play in the capabilities-driven company. The functional organizations within a company must understand the capabilities and the capabilities system. They must translate them into a set of requirements and opportunities for the function to deliver and/or capture; support, advance, and/or differentiate the capabilities; and redeploy their spending and investments accordingly.

As the global economy tentatively recovers from deep recession, forward-thinking corporate leaders are considering how to create new growth. They know that they cannot spur growth through cost cutting alone, even though it has rightfully dominated corporate agendas in recent years. That’s why many highly successful companies—Walmart, Procter & Gamble, and Coca-Cola among them—are actively pursuing capabilities-driven strategies. The CIO has an indispensable role to play in developing and supporting this fresh approach to growth—a role that demands innovative thinking and a willingness to rise to new heights of leadership. IT is often a key element in the successful creation of corporate capabilities. Moreover, an IT team that is properly configured to support the company’s set of essential capabilities can help maintain the coherence needed to realize the full potential of these capabilities (see “The Role of Functions in a Capabilities-Driven Strategy”). That’s why CIOs who embrace their role in realizing a capabilities-driven strategy can advance far beyond providing back-office support: They can help drive their companies’ revenues and profits.

IT is often a key element in the successful creation of corporate capabilities.


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and underlying sources of competitive advantage to the services IT provides. • Balance cost reduction targets with new investment requirements by focusing investments on building or extending the corporate capabilities system while aggressively cutting expenses that do not directly support them. • Empower IT to look beyond traditional business unit and functional silos to drive business process automation and reduce complexity. • Reduce excessive fixed structural cost by attacking its underlying sources and drivers. • More efficiently migrate IT spending from “lights on” investments to new sources of business value.

• Develop new operating, service delivery, and governance models to better align IT to emergent business priorities. • Align IT skills, competencies, recruiting, and training programs to further enhance and drive essential corporate capabilities. Savvy CIOs will recognize that a capabilities-driven approach can carry risks as well. Setting new priorities always creates winners and losers. Major changes reverberate through IT, not only internally but also with suppliers, distributors, and customers. But CIOs who recognize early that change is inevitable and thoroughly prepare for it can mitigate the risks and significantly enhance IT and corporate results.

A capabilities-driven approach to IT promises great rewards. By shaping IT spend, services, and offerings around the company’s capabilities in a way that supports the company’s overarching strategy, CIOs will be better positioned to accomplish the following: • Redefine the traditional boundaries between IT and the business by directly linking business strategies

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Developing a distinct capabilitiesdriven strategy for IT begins with understanding where and how IT drives competitive business advantage. To capture this insight, CIOs need to look beyond short-term constraints, challenge perceived sources of value, and focus on four activities: • Clarifying the company’s sources of competitive advantage and identifying the role IT can play in enabling or deepening them. • Analyzing key drivers to identify the business trends that will have the most impact on IT. Most IT organizations understand the impact of technology trends, but far fewer fully consider the impact of drivers such as competitors’ actions, customer needs and desires, and changes in the regulatory environment. • Reevaluating IT’s services portfolio and reweighting its offerings based on the company’s capabilities and capabilities system. Identifying the financial benefits, skill gaps, and key risks within IT for each corporate capability. • Prioritizing, stress testing, and rigorously tracking investments in

road maps, processes, and skills across business portfolios in order to develop or extend each corporate capability. Once a capabilities-driven strategy is in place in IT, CIOs can use it to better inform their decisions about the types of services IT provides, the quality of those services, and who receives them. To make the best decisions about IT services (whether unilaterally or in conjunction with the senior leadership team), CIOs will need to fully consider the demand management requirements, delivery models, and governance issues associated with each service. Demand Management A shift in business priorities to growth, often in tandem with still aggressive cost reduction targets, has positioned IT demand management front and center with many CIOs and their companies. Next-generation demand management strategies can support CIOs as they work to drive consistency across business units and processes, redraw lines of accountability between IT and the business, and pivot away from taking orders to challenging the business (see “An Energy Company Manages IT Demand”).

CIOs need to look beyond short-term constraints, challenge perceived sources of value, and focus on four activities.


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An Energy Company Manages IT Demand Effectively managing IT demand requires aligning IT services to business priorities in a systematic way, as one large energy company recently discovered. The company, which provides a diversified portfolio of energy products and services in three segments of the market (merchant energy, regulated electricity, and regulated gas), had grown at an enviable compound annual rate of 20 percent over the previous five years, largely via acquisitions. But this strategy placed a premium on speed, flexibility, and minimizing disruption, and as a result, IT integrations were delayed and structural transformation projects were not even considered. When energy prices collapsed and the cost of credit increased in 2008, the downside of this “light touch” to IT became painfully clear as the company found itself with a complex, heterogeneous, high-fixed-cost portfolio of more than 500 business applications. To remedy this situation and effectively seize the opportunities associated with rationalizing its application portfolio and standardizing business processes, the company began by aligning IT to its new business goals. It ranked its application portfolio by developing a framework to evaluate applications based on their short- and long-term business and technical fit. Applications that ranked low in business or technical fit became prime candidates for elimination or reduced service levels. Conversely, applications that ranked high qualified for standardization and additional investment. The ranking process revealed that 35 percent of the company’s application portfolio was not well aligned to future business needs or technical architecture; those applications became prime candidates for retirement. Another 30 percent of applications were candidates for reduced support levels. After the applications were ranked, the total support cost for each was calculated. The company discovered that 15 applications drove more than 80 percent of support costs. However, only eight of those applications were aligned to the company’s future business and technical needs. The poorly aligned applications became prime candidates for retirement. The company also analyzed the workload data for applications that were candidates for reduced support levels to gain insights into the types of application support and corresponding support costs they required. Using workload data such as bug fixes, minor enhancements, major enhancements, and the like, the company created tiered support categories for each application. Each support category was associated with a set of application services to better align support costs and value. Through these efforts, the company was able to cut its structural IT overhead and maintenance costs by 20 to 40 percent and save more than US$25 million per year. At the same time, the company identified the specific applications that deserved greater investment and used them to standardize business processes, drive complexity reduction, and improve its overall competitive position.

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CIOs can hone their demand management expertise and processes in five ways: • Using business and IT architecture road maps to shift from simply responding to and managing project demand to proactively influencing and shaping both project and operational demands before and as they emerge. To successfully support corporate capabilities initiatives while managing costs in a flat budget environment, nextgeneration demand managers will need to carefully balance the shortand long-term trade-offs between “lights on” investments and new project demand. • Explicitly linking IT priorities to the capabilities that create a right to win for the business and then redrawing the IT road map in accordance with that prioritization to direct investment to the support of differentiated capabilities and the reduction of complexity. This will require a reevaluation—and, in most cases, a redesign—of the process by which IT-centric activities are prioritized across the enterprise. By keeping the company’s capabilities-driven strategy firmly in mind, a CIO will be in a better

position to reduce the high costs associated with poor prioritization: In most companies, non-strategic IT costs consume as much as 85 percent of the IT budget—spending that can be redeployed to far better effect. • Ensuring that each project has a defined, accountable business sponsor and that the resources it requires are available. • Investing in talent management programs to upgrade and empower business and business process analysts, project managers, change management, communications, and enterprise architecture skills. These resources, which sit at the intersection of IT and business, will play an increasingly important role in next-generation demand management. • Rigorously screening and tracking pre- and post-project delivery metrics to ensure that both capital and operational IT investments yield the highest return. Delivery Models IT’s delivery models should be drivers of efficiency and joint accountability. They will become increasingly

important as the externalization of applications development, infrastructure operations, and backoffice processes gradually erodes the “factory” side of the IT function, and the cloud enables the externalization of as much as 80 percent of application lifetime spend. To optimize IT delivery models in support of corporate capabilities and coherence, CIOs should do the following: • Carefully evaluate the requirements of each business unit or process to understand the level of speed, flexibility, and/or standardization needed to support business strategy. CIOs should ask questions such as these: Where in our business model is differentiation more valuable than standardization? Which processes and technologies confer competitive advantage? Which of our business units have unique technology needs? • Carefully evaluate and prioritize the types of IT services provided— including lower-cost new technologies such as open source, Linux, virtualization, and software as a service, among others—based on their linkage to and impact on


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business capabilities. Accelerate adoption of the services that offer the greatest utility. • Evaluate how services are bundled and delivered by comparing the costs, benefits, and trade-offs of retained and outsourced services. Then optimize them by consolidating overlapping suppliers, introducing competition into the supply chain, renegotiating existing contracts and service-level agreements, and improving and standardizing end-to-end processes across retained and outsourced activities. • Ensure that delivery models and pricing provide the transparency and flexibility required to quickly adapt to changes in demand. Existing chargeback policies and

procedures should be revisited so the trade-offs can be evaluated and managed by the business. Governance To strike the right balance between cost management and corporate capability investments, CIOs will have to close any gaps between business and IT capital investment planning horizons, more effectively plot business objectives against the IT project portfolio, and directly link IT architecture direction with corporate capabilities. At the same time, to support changes in the IT delivery model, CIOs will need to revisit risk management strategies and information flows between retained and external service providers. In the process, existing

vendor management strategies will need to be updated to reflect changes in service providers, the types of outsourced services, and the service provider geographic footprint. Finally, to ensure that governance programs and processes drive desired results, CIOs will need to link governance to accountability systems and structures. This will ensure that governance programs have teeth. CIOs should also advocate the establishment of a joint business/ IT governance and accountability process. This process should assign correct owners to goals and tasks, track overall progress of projects, maintain momentum, and ensure that individuals (both internal and external) are held accountable for deliverables.

CIOs will need to link governance to accountability systems and structures. This will ensure that governance programs have teeth.

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To successfully execute against cost reduction targets and capabilities support priorities, CIOs will need to make difficult, carefully calculated trade-offs. Achieving these objectives will require a fresh approach that tightly couples IT to the company’s overarching strategy. By engaging in

a capabilities-driven strategy process, at both the corporate and IT levels, the CIO will be well positioned to manage costs while adding business value and meshing IT more closely than ever before with the company’s overall corporate strategy.


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Resources Paul Leinwand and Cesare Mainardi, “The Coherence Premium,” Harvard Business Review, June 2010. “A Conversation with Paul Leinwand and Cesare Mainardi, Authors of ‘The Coherence Premium’ ic-display/48203382

About the Authors Eduardo Alvarez is a Booz & Company partner based in Chicago. He leads the North American energy technology practice and is an expert in business process and technology-enabled transformation. Steven Waller is a Booz & Company principal based in Chicago. He specializes in technology strategy and developing new operating models for energy and financial services companies. Ahmad Filsoof is a Booz & Company associate based in Chicago. His focus is cross-industry technology strategy.

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